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What Is a LLC (Limited Liability Company)?

September 15, 2020

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LLC means “limited liability company,” which is a separate legal entity that is distinct from that of the business owner(s), which means the owners will usually not be personally liable for the company’s debts or lawsuits. This protection cannot be gotten from other business entity structures like a sole proprietorship, general partnerships, or corporation.

One or many people can own an LLC. When one person owns an LLC, it is called a single-member LLC. When more than one person owns an LLC, it is called a multiple-member LLC. LLC’s are basically hybrids that take asset protection of a corporation and combine it with the flow-through taxation benefits of a sole-proprietorship or partnership.

Small businesses and newly established ones mostly choose LLC as it is the popular entity that fits their needs. This includes the fact they are easy to start, simpler, and offer more flexibility compared to a corporation that offers similar protection.

Benefits of LLC’s

  • Protection of assets: Unlike a corporation, the business, not the members is responsible for debts and liabilities.

  • Avoid double taxation: Members are responsible for the profits and losses on their individual tax returns. This leads to a lower tax rate on company profits and avoids double taxation.

  • Ownership Flexibility: There is no membership limit as new members can buy into the business anytime.

  • Versatile tax returns: The members can choose how they want the LLC to be treated as a taxable entity. They can be taxed as a partnership, sole proprietorship, or a C- or S- corporation. This means that LLCs can always take advantage of “pass-through” taxation. This means that the LLC does not pay any LLC taxes or corporate taxes. Instead, the LLC’s income and expenses pass through to the owners’ personal tax returns, and the owners pay personal income tax on any profits.

  • Flexible profit distribution: If members choose, the LLC net income/profits of may be allocated to members based on ownership percentage in the LLC.

  • Minimal compliance requirements: LLC is not like corporations that require an annual meeting of the board, keeping of minutes, formal resolutions, and so on. LLC requires none of that.

  • Enhanced credibility: Having the designation LLC makes your business more favorable in the eyes of partners, investors, suppliers, etc.

  • Flexible management structure: LLC can establish whatever organizational structure the owners agree on. This means the business can be run by the managers or the owners.

How to Form an LLC

If you are looking to create a barrier between your personal assets and the financial liability of your startup, an LLC is the way to go. An LLC could be your best protection against lawsuits, cutting down significantly on paperwork (with annual meetings or recorded minutes) compared to other business types, protects your business for multiple taxation, and ensures credibility.

Steps to forming an LLC

Decide on location

It’s common for business owners to set up LLC in their state, but if you are planning to set up businesses in several states, you may want to consider state-by-state requirements as well as taxes before filing paperwork with the state.

Chose a Legal name and reserve with your state

Requirements from state-to-state vary. It is not possible to register a name that is the same with another registered business entity in that state. Some states require the LLC designation at the end of your business name.

Choose a registered agent or register as one

When forming an LLC, It is important to choose a registered agent, sometimes called a statutory agent. This is the person who receives any official document on the LLC’s behalf. However, the owner of an LLC can choose to serve as the LLC’s registered agent as well.

Create an LLC operating agreement

This document will describe the mode of operation of the LLC, which includes how the business will be managed, who runs the business, rights and responsibilities of LLC members, and more.

File your Articles of Organization

The Articles of Incorporation is a legal document that must be filed with the Secretary of State to establish your LLC. This document will be accompanied by a filing fee as well as other information such as the name of the LLC, duration, name/address of the registered agent, and names of LLC managers. If successful, you will receive a notice stating that your LLC has been formed. The filing fees vary by state.

Apply for a business bank account, licenses, and other certificates

Once the LLC is successfully formed, you can apply for an Employer Identification Number (EIN) through the Internal Revenue Service website. In addition, you can now set up your business bank account.

Still need help forming your LLC? I’m here to help! Contact me today and I can help you establish your business while ensuring that you are compliant with all the state and federal requirements. I am here to help your business grow!

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